Final answer:
Companies with unionized workforces have limited flexibility in laying off employees due to binding collective agreements, leading to a higher operating leverage due to a more fixed cost structure. Union agreements often include job security and better wages, which can result in higher productivity but also increased fixed labor costs for the company.
Step-by-step explanation:
Companies with unionized workforces face constraints in laying off employees due to collective agreements, resulting in a higher degree of operating leverage.
Collective agreements between companies and labor unions often stipulate conditions that protect union workers, making layoffs more challenging and potentially costly for the company. Operating leverage refers to the ratio of fixed costs to variable costs in a company's cost structure. A high operating leverage means that a company has higher fixed costs relative to variable costs. Companies that are unable to easily adjust labor costs due to union protections have a greater portion of fixed costs—mainly labor—thus increasing their operating leverage. This can have financial implications, particularly during downturns, as revenue declines may not be easily offset by reducing labor costs. It also suggests that during times of increasing revenue, these companies could experience larger proportional increases in profit due to their higher fixed costs and greater sensitivity to sales volume changes.
Moreover, unions typically negotiate for higher wages, job security, and training, which can lead to higher productivity and reduced turnover. However, with increased labor costs, any shifts in demand or competitiveness may require the company to maintain employment levels despite cost pressures, further increasing their operating leverage.